Fed 'experimenting' with mortgage data conclusions

June 13, 2005

Home Mortgage Disclosure Act: The real deal

By Neil J. Morse Inman News

A key Federal Reserve official who will co-author the Board's long-awaited interpretation this fall of 2004 Home Mortgage Disclosure Act data – suggesting which, if any, mortgage lenders discriminated against minority borrowers – says the interest-rate triggers created to identify discrimination were more or less a guess.

Far from being hard and fast indicators of "good" or "bad" lending practices, the HMDA triggers are, says Special Counsel Robert Cook, simply the Fed's first attempt to determine a long-term strategy for identifying discrimination against protected classes of borrowers.

Speaking at a public forum in Washington, D.C., late last week, Cook, a recognized fair lending expert, said the Fed "has to work out the kinks this year, and even for the next few."

He will be one of three authors of the Board's report on HMDA data due out this fall, along with economists Glenn Canner and Robert Avery. Their report will provide a high-level view of the mortgage lending landscape, rather than particular regions, cities or lenders, a Fed spokesman said.

The 30-year-old Home Mortgage Disclosure Act, which comes under Federal Reserve purview, was upgraded for 2004, requiring lenders to report new categories of data, ostensibly to uncover disparate, or discriminatory, behaviors. A key "triggering" metric is whether loans are three or five points (or more) above comparable Treasury bond rates at the time, depending on loan type.

"We'll find out if we picked the right spreads," Cook said, noting that the Fed also is "experimenting" with some ideas for "teasing" additional conclusions from the HMDA data.

"We'll experiment with non-racial aspects," producing what he called, "an index of propensity to make unaffordable loans," defined as "unsafe and unsound." This was "something we just came up with (recently)," remarked Cook.

The emphasis on "unaffordable loans" stems from the Fed's belief that such transactions are the "epitome of predatory lending," he stated.

For that reason, said attorney Paul Hancock, lenders must (begin to) document reasons for discretionary pricing. "It amazes me," said Hancock, whose firm provides legal counsel to mortgage industry clients, "how few lenders have instructed their loan officers in the factors that are appropriate (or not) for higher or lower overages (charges)."

He urged lenders to set limits on their brokers' prices and fees, and provide training to reduce reputation risk and litigation risk.

According to Hancock, the "big surprise" coming from HMDA data reported thus far, is that "subprime lenders are only making a small amount of triggering loans."

Before the current attention on their practices by the Federal Reserve, Hancock noted that lenders had been scrutinized by the Federal Trade Commission, which primarily looked for deception or unfairness. "Now, with HMDA, it's about impermissible discrimination," he explained.